Poland vs “Blueberry Factory” Sp z.o.o., June 2018, Supreme Administrative Court, II FSK 1665/16

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In this case there were family, capital and personal ties between the Blueberry Factory and its shareholders, and the terms and conditions of the Company’s transactions with its shareholders (purchase of blueberry fruit) had not been at arm’s length. The higher prices paid by the Blueberry Farm benefited the shareholders (suppliers), who thus generated higher income from their agricultural activities, not subject to income tax. The company generated only losses in the years 2011 – 2013.

According to the Polish tax authorities, the Blueberry Farm purchased blueberry fruit at excessive prices and thus overstated its tax-deductible expenses by PLN 347,845.48. The excessive prices (relative to market prices) increased the income of its shareholders (agricultural producers), whose income was not subject to personal income tax as being derived from agricultural activities.

The tax authorities applied the provisions of Art. 11.1, Par. 2.2 of the Corporate Income Tax Act of February 15th 1992, as the gross margin earned by the Blueberry Factory on sales of blueberries (2.56%) did not cover the costs of consumption of materials and energy, third party services, depreciation and other costs, which resulted in a loss for 2012. (PLN 218,838.03), and losses for 2011 and 2013. The application of excessive fruit purchase prices from the Company’s shareholders (4 persons running fruit farms and 1 farm owner), with family, personal and capital ties, also resulted in the Blueberry Factory taking out 6 loans from it’s shareholders for the total amount of PLN 877,697.70. in 2012.

The average gross margin of the Blueberry Factory when selling goods (blueberries) in 2012 was 2.2%. Meanwhile, unrelated entities, selected in the course of the proceedings, which were involved in the purchase and sale of blueberries, having the relevant certificates necessary to sell fruit abroad, had gross margins ranging from 3.5% to 21.87%. The tax authorities held that the average gross margin in comparable transactions was 11.35% and PLN 2.27 per kilogram.

The tax authorities determined the Blueberry Factory’s corporate income tax liability for 2012 at PLN 22,114, instead of the declared loss (PLN 218,838.03).

The Court of first instance agreed with the tax authorities that there were capital, personal and family ties between these entities. In the opinion of the court, all the conditions referred to in Art. 11.1 of the Polish Act on Public Offering, which authorises the determination of the income and tax payable by way of estimation, had been fulfilled.

The Court also considered the pricing method used by the authorities – resale prices – to be appropriate.

The comparability analysis took into account both the type and quality of fruit traded (the fact of holding certificates). The average margin applied by independent entities was calculated. In estimating the cost of blueberry fruit purchased by the Company, favourable assumptions were made, as the basis for the estimation was the margins applied by entities (fruit producer groups) which purchased blueberry fruit, holding only the G-certificate and applying the lowest margins among the surveyed entities. The comparability analysis also took into account, among others, such factors as the certificates held, type of recipients of the goods (domestic and foreign), type of entity, production process, technologies used, type and time of transactions. The Court also deemed it appropriate that DUKS issued a provision under Art. 179.1 of the Polish Corporate Governance Act, which excluded information on entities conducting business competitive to the Company.

The Blueberry Factory filed a complaint against the decision.

The Supreme Administrative Court considered that the appeal was justified and therefore had to be granted.

The gist of the dispute in the case at hand is to assess whether, in fact, the procedure for estimating income [Article 11 of the Act] was carried out correctly, as claimed by the authority and accepted by the Court of First Instance, or, as the applicant argues in cassation – with a breach of the provisions of the Act and the Regulation – which is linked to the authority’s analysis of the comparability of transactions.

“All this allows us to conclude that, although the OECD Transfer Pricing Guidelines do not contain standards of generally applicable law (Article 87(1) of the Polish Constitution), when interpreting the provisions governing the prerequisites for the use of transfer pricing and the general conditions for determining income by means of estimation (Article 11(1) to (3) of the Act), the indications of those guidelines should be taken into account as a kind of “set of good practices” and a point of reference for choosing the right interpretative direction.”

“In the light of the above, contrary to what the WSA suggested, the aforementioned guidelines will be relevant to the assessment of the assessment method used by the authority and, in particular, of its implementation.”

The Court of first instance did not sufficiently consider the proceedings conducted by the authorities – in particular with regard to the comparability analysis. It was principally assumed that the Company’s business model was the basis for its market strategy – which in its opinion was to generate losses in order to maximise profits of its shareholders. At the same time, despite arguments consistently raised by a party in the course of proceedings, the court did not address issues regarding comparability factors. First of all, the key issue in this case, namely that the party has the status of an agricultural producer group. This, in turn, raises other relevant issues: – the specific nature of the entity, the principles and essence of the group’s operation, the scope of the objectives it should pursue, the strategy of producer groups – the use of aid measures, the issue and importance of the Recognition Plan, the issue of the group’s market strategy during the recognition period.

The Supreme Administrative Court referred the case back to the Court of first instance for reconsideration.


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Poland II FSK 1665-16

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